Reconciliation is the process of ensuring two sets of records (usually the balances of two accounts) match up, for example comparing your bank statements with your accounting.
Reconciliation is the process of comparing your bookkeeping with actual data, to ensure it’s all accurate and in order.
Checking your bookkeeping against your bank statements is called bank reconciliation. Bank reconciliation is very important as it checks that your bank statements—actual real life—matches with your bookkeeping.
Usually a bank reconciliation is done on a monthly basis—especially for contractors, freelancers or small business owners—but if you run a large business, you might need to do it several times a month.If you have a holding company, it might be enough to do it every 6 months or every year.
Other types of reconciliation
Common types of reconciliation include customer reconciliation to confirm that your accounts receivable for that client matches with what your client has recorded in their accounts payable. This type of reconciliation is only done if your client is a business, not for private individuals.
Another type of reconciliation is inventory reconciliation where you compare your actual inventory with the inventory recorded in your accounting, to reconcile data entry errors, loss or theft.
Why reconciliation is important
When you, for example, compare your bank statements with your accounting, you can uncover discrepancies. These have to be fixed so that your accounting is correct and up-to-date, especially before the end of the fiscal year, when you have to submit the annual report.
If you do reconciliation periodically—and fix the errors you encounter—you won’t have to spend a lot of time trying to find sales documents and verifying old transactions.
Common errors you can find
Some of the most common error that you can uncover when you do your reconciliation is:
- You’ve forgotten to record some transactions in your general ledger
- You’ve recorded some transactions twice in your general ledger
- You’ve recorded transactions on the wrong date
The bank statement is your reference point here: Go through your general ledger and ensure that you’ve recorded all transactions in your bank account for this period. Check to see that you haven’t recorded anything twice or recorded it on the wrong date.
Hopefully, you’ll find a transaction that matches the discrepancy exactly. If not, you’ll have to keep investigating.
A good place to start if you can’t find the discrepancy is to look at card fees or bank fees. These amounts are usually small, and they’re easy to overlook, so make sure that you’ve recorded these.